This I understand...this is a basic understanding of the difference between a long and a short...a long only has a potential loss of the value of the position when bought...whereas a short has unlimited potential (in theory).
Brec. and I had already agreed to this point from the very beginning. I do not know why Atto is bringing up this more obvious part of the equation. The question (discussion) between Brec and I is on the dynamics involved against the accounts up to the point that a long goes to zero.
Here is the way I see it:
SHORT EXAMPLE
1>A margin account begins with $20,000
2>You short $10,000 and it goes against you $2000.
3>Account equity is now $18,000
4>Value of stock is $12,000
5>Short Position Value $8,000
6>%exposure is now 8000/18000 or 44%
The problem as I see it is that by using Brecs. method the value of the stock ($12,000) is used to compute the Short position value on line 5. In actuality it should be calculated by subtracting the original shorting price (10,000) by the amount loss (2000) to give you the $8,000. figure used on line 5 and 6
Using Brecs method results in 12000/18000 or 67% for line 5.
This would be riskier but in actuality if it were true. But it is not because the formula is wrong
LONG EXAMPLE
1>A margin account begins with $20,000
2>You Buy $10,000 long and it goes against you $2000.
3>Account equity is now $18,000
4>Value of stock is $8000
5>Long Position Value $8,000
6>%exposure is now 8000/18000 or 44%
On longs line 5 and 6 are always the same. It is by using this same assumption to compute the value of the short position that the mistake is made.
When done properly, the exposure on line 6 is the same for both |
